Let us have a look at the points of distinction between the two concepts below to have a better understanding of them.
Table Of Contents
Difference Between P/FFO VS P/AFFO
The difference between P/FFO and P/AFFO lies in the way the latter is calculated with respect to the required adjustments to the former. P/FFO stands for Price to Funds From Operations, and P/AFFO is the Price/Adjusted Funds From Operations. The key difference between both is that the price-adjusted funds from the operation are a regularized version of the P/FFO, which helps derive the performance of a Real Estate Investment Trust (REIT). It also means that to determine the P/AFFO, the value of P/FFO needs to be calculated first. Since it is applied in the real estate industry, amortization and depreciation are considered in the deduction.
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Key Takeaways
- Capitalism and socialism are the segregation of the economic system that indicates the extent to which a government controls the economy.
- Capitalism is the system that encourages private ownership of production factors by individuals and businesses to encourage profit-making, competitiveness, innovation, and efficiency.
- Socialism, on the contrary, is an economic philosophy that aims to bring economic equality among the citizens by ensuring central or state ownership of the production means and factories.
- However, it is difficult to witness a pure capitalist or socialist economy in the current scenario since most countries have mixed economies that combine capitalism and socialism.
Comparative Table
| Particulars | P/FFO | P/AFFO |
|---|---|---|
| 1. Meaning | Defines the cash flow from a REIT’s operations | Defines the cash flow from a REIT’s operations |
| 2. Value | Since it does not include capital expenses, it is higher than P/AFFO | Since it does not include capital expenses, it is higher than P/AFFO |
| 3. Preference | Less preferred | Less preferred |
| 4. Formula | Net income plus depreciation and amortization plus or minus any profit or loss from the property’s sales and subtracting the interest income | Net income plus depreciation and amortization plus or minus any profit or loss from the property’s sales and subtracting the interest income |
| 5. Accuracy | Less accurate | Less accurate |
| 6. Standardization | It is followed in the same standard way everywhere | It is followed in the same standard way everywhere |
What is P/FFO?
P/FFO measures a REIT’s performance in terms of fund value. Though many such metric indicators like the Earnings Per Share (EPS) and P/E (Price to Equity) ratio exist for comparisons, P/FFO is typically applied in the real estate industry. Unlike in other businesses, when it comes to real estate, the property or land’s value appreciates with time. Therefore, FFO excludes depreciation, making it a more reliable valuation for real estate performance.
A REIT or any other company related to real estate is required to submit its FFO in its annual report in the footnotes, along with the net income values. One key factor that makes FFO a more reasonable valuation is that it follows a standard formula for every REIT and adds depreciation to the net income. Furthermore, there is an FFO multiple that derives a property’s per-share value. It is the ratio of price per share to the FFO per share and helps determine the investment’s performance.
The standard formula for P/FFO is:
P/FFO = Price Per Share / Funds From Operations (FFO) Per Share
Where,
FFO = (NI + D + A + PSL) - PSG - II
In this formula,
- NI - net income
- D - depreciation
- A - amortization
- PSL - loss from property sales
- PSG - gains from property sales
- II - interest income
Example
Suppose a REIT had a net income of $99000, a depreciation of $18000, and gains from the property sales of $45000 with an interest income of $36000.
Putting these values together in the formula
- FFO = (99000 + 18000 + 45000) - 36000
- FFO = $126000
In this example, amortization is not considered to keep the calculation simple; otherwise, it also plays a key role. Moreover, based on this value of FFO, the P/FFO can be figured out when the price per share is known.
What is P/AFFO?
P/AFFO is the extended version of P/FFO when it comes to real estate and property investment and accounting calculations. Several factors need to be considered now. When FFO is calculated, it does account for depreciation and amortization, but at the same time, it does not acknowledge the other expenses that are incurred in the REIT. These costs can be anything from rent to other miscellaneous costs, and hence, there is no particular formula to calculate P/AFFO.
But in general, the P/AFFO formula would be:
P/AFFO = FFO + Rent - Maintenance - Capital expenditure
Apart from these, there may be other expenses that can also be considered. Professional analysts like to use P/AFFO more than P/FFO and refer to it as residual cash flow value. The metric also helps investors predict the future capability of a REIT to pay dividends.
Example
Now, extending the first example of FFO, the FFO value was $126000, and if the rent is $27000, maintenance cost is $9000, and capital expenditure is $54000
Putting the values in the P/AFFO formula
- P/AFFO = 126000 + 27000 - 9000 - 54000
- P/AFFO = $90000
Comparing both examples, it is clear that P/AFFO is an adjusted version of the P/FFO that considers the factors not considered in the FFO calculation.
The P/AFFO gives a more accurate idea about the cash flow. Hence, an investor or firm can be ready with a more realistic figure in mind. P/AFFO especially works in real estate, land, and property assessment because compared to other assets, both tangible and intangible, land has its separate characteristics, and its market value, maintenance, and other expenses behave differently. Not only for the firm but for an investor, the value of both FFO and AFFO helps understand the future returns and long-term credibility of the REITs before investing their money in real estate.
Similarities
While there are multiple differences between P/FFO and P/AFFO, they also share some similarities. Let us have a look at them in brief below:
- Both P/FFO and P/AFFO gauge the performance of Real Estate Investment Trusts (REIT).
- For P/AFFO, the P/FFO needs to be determined first, which means both metrics are part of the same final calculation.
- Both metrics sum up the non-cash expenses to remove the depreciation and amortization impact, eventually not influencing the cash flow.
- The International Financial Reporting Standards (IFRS) does not officially acknowledge these measuring indicators for the real estate industry assessment.
- There may be scenarios where both methods can offer a single common result.
